Monday, 15 November 2010

Known unknowns and unknown unknowns

This evening Bloomberg's Tariq Panja has broken a story that Red Football Joint Venture Ltd (the parent company that issued the famous Payment In Kind loans) is to redeem all £220m of the PIKs on 22nd November. Perhaps more importantly, Bloomberg report that none of the funds to redeem the PIKs will come from Manchester United.

As has been well documented, under the terms of the bond issue, the Glazers can take £95m from the club whenever they wish. The fact that they are NOT using this dividend entitlement to repay the PIKs raises the obvious question; where is this money coming from?

There seem to me to be three main possibilities (and probably a few dozen less likely ones):

1. Refinancing
The PIKs are being refinanced with a new form of debt, secured (as the PIKs are) on RFJV's shares in Red Football Ltd. If this was the case, it would be reasonable to suppose that the interest rate on this new debt was lower than the 16.25% currently being paid on the PIKs. The question would remain as to how this debt would be repaid in the long-term and whether the burden of this repayment would fall on the football club.

2. Sale of an equity stake
The Glazers have sold a stake in Red Football Limited to a third party outside investor and are using all or some of the proceeds to repay the PIKs. The consequences of this would obviously be hugely uncertain. Who could this investor be? What stake would they own? How would their ownership impact the running of the club?

3. Sale of other assets
The Glazers have secured significant sums from another source, perhaps by selling assets. I find this incredibly unlikely as the only asset valuable enough is the Tampa Bay Buccaneers. The fact that redemption notices for the PIKs have already been issued suggests the funding is already in place which does not tally with a sale of the NFL franchise.

As someone who has repeatedly and vehemently stated that the club's money would be used to repay the PIKs, I can only eat humble pie at this point. Another source has clearly been found and that means I was wrong. I do believe however that until we have concrete answers about the source of this £220m it is best to reserve judgement about what this means for United.

Tomorrow (Tuesday 16th November) Red Football Limited announces its results for the three months to September 30th. These results may cast more light on what is going on, but there is a good chance that no further information will be forthcoming as the PIKs are held by the parent company that is not reporting its figures. I will be blogging about the figures tomorrow.